Telecom stocks likely to stay on winning streak

CBS.MarketWatch.com

NEW YORK (CBS.MW) -- Strong performances by telecom stocks over the past year are likely to continue as demand for data and wireless services explodes, according to two top fund managers.

Two fund managers, Liam Burke, who co-manages the Flag
TISHX, +0.30%
and Ivan Arteaga, who co-manages the Gabelli Global Telecom fund
GABTX, -0.14%
say strength in the sector has been driven by voracious demand for Internet and wireless services, as well as a healthy consumer appetite for convenience.

Part of what's driving the explosion in telecom are innovations that make life easier and more portable, such as cellular phones, pagers and e-mail, Burke says.

According to Big Charts mobile communications has been the best performing sector of the year so far, up 122 percent led by stocks like Nextel
nxtl
Sprint PCS
pcs
and Rural Cellular Corporation
RCCC, +0.00%See industry performances.

Lower-cost data communications have created a catalyst for growth in the marketplace, Burke says. Now e-commerce is becoming a strategic imperative, helping to drive down costs and improve productivity, he says.

Global focus

SBC Communications
SBC, -0.79%
is one large holding. It's merging with Ameritech
AIT, +0.35%
and as a result, the company is moving from a regional to a national focus, Burke says.

"We think that they can move into the global arena," he says, aided by alliances in Mexico and Canada. "Their management has a history of underpromising overdelivering.They're very focused in how they manage their business,yet they're open to new ways of running things."

That's essential for adapting to the swift change that's sweeping the telecommunications sector right now, he says.

Growth is coming from the company's leading position as an Internet service provider. It vaulted into that position through its acquisition of Uunet. The company's management is well-respected, and its Internet service and international businesses are growing, he says.

"They are committed to double-digit growth," Burke says. He expects the company to earn $1.97 a share in 1999, up from 89 cents in 1998, and he sees the company earning $2.83 a share in 2000.

In Internet service Burke also names as an example America Online
aol
one of the fund's largest holdings. "Their focus is on the consumer. They emphasize convenience. They're user-friendly and they focus on their brand," he says.

For companies to stay competitive, Burke says they must be low-cost leaders or or add value by combining other products, such as bundling long-distance and cable or internet service, or web hosting for small businesses, for example.

"Cost reduction in this business will always be imperative, but you have to have a good cost structure to compete," he says.

"We're always looking at Internet-related applications," Burke says. He's also on constant lookout for "good companies that get knocked down in price."

Busy circuits

From a macro-economic perspective, the sector's been performing well for the last year and a half, says Gabelli's Ivan Arteaga. It's a $500 billion dollar market that's been growing at more than 10 percent annually, he says.

"It's been firing on all cylinders, due to strong economic conditions in the U.S., butalso in many major markets around the world, including Germany, France the U.K. and Japan.The investment environment has been very strong," Arteaga says.

On a more industry-specific basis, regulatory trends have been very favorable, he says. Broad legislation to open the markets in the U.S. is being used as a blueprint for companies around the world to do the same. Markets are opening in Europe, for example, he says.

"We?ve seen the emergence of a number of new entrants. There's been a reduction of artificial barriers to competition. We're seeing revenue growth and volume growth.

Arteaga, too, notes that there have been huge advances in technology, spurred by demand for more sophisticated telecommunications capabilities. One sector that's benefited from these trends has been the wireless industry, he says.

Consolidation has been accelerating, and that will likely continue, he says, pointing to Vodafone's acquisition of Airtouch, and British Telecom's
BT, +0.19%
latest agreement with AT&T
T, +0.38%
"A lot of the large companies are looking cross-border," he says.

"From theses deals, we?re seeing that there's some rationale for consolidation. It allows carriers to serve certain types of customers on a one-stop shopping basis.There are huge economies of scale," he says.

Arteaga says companies are busy trying to find suitable partners.

"The U.S. is the biggest telecom market in the world.We sense international interest here," he says.

Big spenders may include Deutsche Telekom
dt
which has "a huge war chest," Arteaga says. "They've got billions of dollars in cash and they've expressed publicly their interest in making global alliances," he says.

He says it wouldn?t surprise him if the company made a big investment in the U.S. Another trend is U.S. interest in Europe. There's been lots of speculation that a Sprint, or a regional Bell company might be pursuing a partner, he says.

Another trend Arteaga sees is greater demand for wireless services.

"Plain old voice calls over time are going to move from standard networks to wireless," he says. "People like this kind of mobility. It will continue to evolve."

Arteaga's picks include Cablevision, Viacom and Omnipoint.

Another pick is Telephone and Data Systems
TDS, +0.86%
which is very well-positioned for those trends going forward, he says. The have a niche approach. They own rural telephone, cellular and personal communications networks.

Their properties still have substantial upside Arteaga says. They have good business, and the stock is undervalued at 75. "It's worth $130," he says.

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